On January 5, 2012, Ernest Earner Sells His Patent (Basis

question 25

Multiple Choice

On January 5, 2012, Ernest Earner sells his patent (basis of $0) for a machine to a company which will manufacture the machine. He receives $150,000 plus $15 for each machine manufactured. In 2012, 10,000 machines were manufactured. What amount(s) must Ernest report on his 2012 tax return?

• A) $150,000 long-term capital gain; $150,000 ordinary income
• B) $150,000 short-term capital gain; $150,000 ordinary income
• C) $300,000 short-term capital gain
• D) $300,000 long-term capital gain

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Definitions:

Current Liabilities

Obligations or debts that a company needs to settle within one fiscal year or its operating cycle, whichever is longer.

Vertical Analysis

A method of financial statement analysis in which each entry for each of the three major categories of accounts, or financial statements, is represented as a proportion of the total account.

Net Income

The amount by which revenues exceed expenses.

Cost Of Goods Sold

The direct costs attributable to the production of the goods sold by a company.